Why Is The FTSE 100 Lagging Its International Peers?

It has been a relatively good year for investors around the world, especially European investors. Year to date, France’s CAC 40 is up around 14.2%, Germany’s DAX has risen 12.8%, the Europe-wide STOXX 600 has gained 11.3% and the STOXX 50, an index of Europe’s 50 largest companies, is up 9.8% year-to-date. Over in the US, the indexes have put in a less impressive but still positive performance. Year to date, the S&P 500 is up 1.5% and the Dow Jones Industrial Average is flat for the year. 

Unfortunately, the FTSE 100 has lagged all of its major international peers this year. Excluding dividends, the index is down 3.5% year-to-date, and this isn’t just a one-off. For the past five years, the index has lagged the rest of the world by a significant margin while the S&P 500 has led the pack.

Since the end of 2010 the S&P 500 has risen 74.1%; in comparison the FTSE 100 has only gained 10.5% over the same period, which is around 2.1% per annum — less than the return achieved on 10-year UK government bonds over the same period. 

The FTSE 100’s poor returns can be blamed on the poor performance of the resource sector. The index has more exposure to this volatile and highly cyclical sector than any other index in the world, and this clearly shows through in the return figures for the past five years.

If you’re really looking to boost your returns and benefit from global growth, I’d argue that the S&P 500 and the STOXX Europe 600 are the two indexes you need to track. 

The S&P 500 is the US’s leading stock index, which groups together the 500 largest companies list in the US. In many ways, the S&P 500 is an index of the world’s largest and most recognisable companies, including Apple, Alphabet, Amazon.com, ExxonMobil, Microsoft and Disney. 

And the S&P 500’s performance has eclipsed that of the FTSE 100 over the past 35 years.  

A simple analysis shows that since 1 January 1980, the S&P 500 has returned 1,861%, excluding dividends. Over the same period, the FTSE 100 has only returned 478%. London’s leading index has underperformed by 1,383%. The STOXX Europe 600, which represents 600, large, medium and small-cap companies across 18 countries of the European region, has outperformed the FTSE 100 by 30% over the past five years.

Based on historic trends, it’s clear that UK investors would have been better off investing overseas than investing at home for much of the past decade. But many investors are concerned about the risks of investing in foreign markets. A lack of information and foreign exchange risks are the two most commonly cited reasons for avoiding international markets. 

However, many financial products have hit the market during the past few years that have mitigated these risks. For example, a tracker fund removes the need to keep an eye on individual stocks 24/7, and many trackers are now offered in multiple currencies.

Three great international trackers are the iShares S&P 500 GBP Hedged UCITS ETF only charges 0.45% per annum and tracks the S&P 500 without exposing you to currency risks. For Europe, there’s the UBS MSCI EMU hedged GBP UCITS ETF, which tracks the 439 constituents of the MSCI Europe. The ETF pays a gross dividend yield of 3.2% and charges 0.33% per annum in fees. And finally there’s the Lyxor UCITS ETF EURO Stoxx 50 Monthly Hedged C-GBP fund for hedged exposure to Europe. The Lyxor fund charges 0.2% per annum.